A heap of money that can push gold to new highs!

Mar 15, 2011

In this issue:
» Japan's fiscal position to turn worse in the aftermath of the quake
» Robert Shiller's dire new warning
» Buffett makes another bet on emerging market story
» China goes past US as the world's largest manufacturer
» and more!

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It doesn't matter that the yellow metal has had a phenomenal run in the past decade. Factors like excessive money printing, inflation, public unrest and store of value still hold good and hence, gold can still provide attractive returns from here on.

However, a gentleman named Shayne McGuire has taken the discussion about how high gold prices can go to an altogether different level. McGuire, it should be noted, is a fund manager who manages a US$ 330 m gold portfolio at a US based pension fund. In his recent book, McGuire has argued that US$ 10,000 per ounce gold, a jump of more than 7-fold from the current levels, is well within reach!

Indeed, one is bound to dismiss Mr McGuire's bold prediction as pretty outlandish. But we believe he has a pretty strong reason to support the claim. Do you know who manages the world's largest amount of wealth? Well, it is the world's pension funds. As per estimates, global pension assets were believed to be in the ballpark of US$ 31 trillion. To put things in perspective, it is more than twice the GDP that the US, the world's largest economy by far, recorded in recent memory.

Now, here comes the real surprise. As of now, a mere 0.3% of pension assets are invested in gold and gold stocks. Even if this allocation doubles to 0.6%, still a small number by any yardstick, this will represent close to US$ 100 bn of new money to be poured into gold related assets. It would be worth adding for a perspective that that size of the world's largest gold ETF is US$ 55.2 bn. Hence, the push that this new US$ 100 bn can give to gold prices cannot be emphasised enough.

We are not sure whether this will result in gold witnessing a more than 7-fold rise. But the increase nevertheless is certainly going to be extremely meaningful. Do bear in mind that we have not even considered the scenario where the allocation by pension funds towards gold goes up to even higher levels. Imagine what will happen if pension funds view gold as strategically important as other financial assets like real estate and commodities. In such a case, all bets would be off. Thus, have you considered investment in gold yet? If not, do it before it is too late.

Do you think gold can still rise massively from here on? Give us your views or post them on our facebook page.

 Chart of the day
Smartphones and tablets are indeed hot properties in the digital world today. These devices have indeed set a new benchmark in how people go about organising their tasks, communicate and access information. Infact, one would not be mistaken to assume that these gadgets have now reached their saturation point. However, nothing could be further from the truth. As today's chart of the day shows, if the penetration of other popular electronic items and information media are anything to go by, smart phones and tablets seemed to have only scratched the surface. With close to about 400 m users, these gadgets are the lowest placed on the list. Indeed, we are talking of a huge opportunity here if these devices are able to rival the penetration achieved by mobile phones and internet.

Source: San Francisco Chronicle

The end of the world was predicted to take place at the end of 2012. This would be the day of reckoning for mankind. Well, at the rate things are going right now, it seems like this deadly package has checked in a little too early. Robert Shiller, the economist who predicted the subprime housing crisis has another dire prediction. He issues a warning that the Japanese quake and the tsunami could reach a global scale. This could shake stocks across the globe and set the markets up for a crash within days.

Japan may be known for its seismic activity. But, in this age of increased globalization, no country is safe. In 1995, a big earthquake in Kobe, Japan sent worldwide stocks hurtling downward. The Nikkei is down over 10% today, fearing a nuclear crisis. And the rest of Asia is also in deep red waters today. It is events like these that cause investors to run for cover, especially away from risky assets like stocks. Seems like Shiller's prediction has come true. But the question remains, what should investors run towards?

Staying put with Japan, 'in the best of health' is not a term associated with Japan's fiscal status. For a country that has lived beyond its means for decades, fiscal status cannot be good. But the recent natural disaster has only made matters worse. In fact, as per Moody's, Japan's fiscal 'tipping point' is likely to get preponed. The Japanese government has been funding its massive fiscal deficit so far by issuing bonds. But higher expenses to account for the rehabilitation and rebuilding in the aftermath of the disasters means that the government will accumulate even higher debt.

Speaking of government debt, by 2012, Japan will see the same swell to 210% of its GDP. It will stand at a colossal 997.7 trillion yen (US$ 12 trillion). That will be double of even the US' government debt of 101% of US GDP. These are certainly dire economic circumstances staring at the Japanese economy.

That Warren Buffett is highly positive on the future of the US economy is no secret. As he recently wrote in his 2010 letter to shareholders - "America's best days lie ahead."

However, if his latest stock investment indicates anything, Buffett seems to be also veering towards emerging markets. His company Berkshire Hathaway has acquired the lubricant maker Lubrizol in a US$ 9 bn deal. About 65% of the company's sales come from outside North America, and suggests that Buffett is now eyeing growth in emerging markets as a target to deploy the huge cash Berkshire has built up.

Interestingly, Lubrizol, which had US$ 5.4 bn in sales in 2010, is a classic Buffett-style company. It's a global leader in several market applications of lubricants and, as Buffett suggests, is run by a talented CEO (James Hambrick). And as Buffett has stated, "Our only instruction to James - just keep doing for us what you have done so successfully for your shareholders."

Now you can call this one key validation of Buffett's increasing interest towards markets outside North America. As per reports, China has replaced the US as the world's top manufacturing nation. As per data, China now accounts for 19.8% of the world's manufacturing output, compared with the US at 19.4%.

This shows the increased competitiveness of the dragon nation and the reduced competitiveness of the world's largest economy. We see this as a fundamental shift in the global manufacturing setup, which is unlikely to be reversed in the future.

Anyways, while the US has lost out on size to China, it stands miles ahead when it comes to productivity. China's manufacturing is supported by 100 m employees. The US does it with 89% less number of employees. Now that's a huge gap that China can only dream to cover, also given its ever expanding labour force!

Meanwhile, news of the worsening state of affairs of Japan's nuclear power crisis sent all Asian markets into a tailspin today. India was no exception with its benchmark Sensex, trading lower by around 160 points at the time of writing. Heavyweights like Infosys and ICICI Bank were seen adding the maximum selling pressure. European indices too have opened on a negative note.

 Today's investing mantra
"To me, it's obvious that the winner has to bet very selectively. It's been obvious to me since very early in life. I don't know why it's not obvious to very many other people." - Charlie Munger

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9 Responses to "A heap of money that can push gold to new highs!"

sarat palat

Mar 27, 2011

Definitely the price of gold is going to rise in the coming months/years. There exists the uncertainity of the developed countries coming out of the recession. The future of US dollars. The risk associated with the investment in the stock market. All these factors make the investment in the Gold a safer bet.


Manoj Kumar

Mar 18, 2011

Historically gold has had cycles of around 20 years in India. And as of now 20 years are about to complete in this cycle. It may go up for a few years more but eventually has to come down and come down in a big way.



Mar 15, 2011

As long as the Dollar continues to command an international exchange currency status, the US and the Fed in Particular will ensure that Status quo remains, and towards that no matter how much more it gets devalued, immaterial of the other currencies, Gold will continue to shoot up.
Probably, when any other strong currency, stands compare and drags down the dollar, will gold begin to slide down.



Mar 15, 2011

No, i don't agree. india is amomg one of the bigest consumer of gold. it goes without saying every indian marriage is incomplete till such time there is not a transaction of atleast around minimum of 500 to 600 gms of gold. and as such now marriage season is over till mid may, therefore rather you most likely are going to witness a great bear run starting very soon for a quitesome time!



Mar 15, 2011

I have read with interest your prognosis on Gold quoting expert opinion. However, it would reinforce this study only if you put a time frame to this study, else you could even say that Gold will rise to $100,000/= per oz, which it may in the life time of your great great grandson!!

Hence it would help if you could give out if you give out rates of increase or decrease with a time band how so ever broad it could be





Mar 15, 2011

for time being it will fall by 20% - 25% and then it may rise to 80- 100% may be by period of 2-3 years


Yoginder Saxena

Mar 15, 2011

Definately,gold will move forward toward a new high i coming days & it is mandatory that Pension fund will be surely park in Cold & Silver commodities.



Mar 15, 2011

You guys sound as confused as other investors are, when it comes to forming opinions around Gold. I recollect a historical chart that you guys made the other day, indicating how prices of Gold and Silver crashed severely after their bull runs.

I doubt if it merits one McGuire's comments/research to change that opinion.

But the bottomline for commodities and currencies is that there is no yardstick to say if they are expensive or cheap. It is pure demand-supply driven and as retail investors, it is far too complicated to decipher anything about production or demand for these commodities.

In my mind, only liquidity and sentiment are guidelines here. But again, as retail investors, probably we can judge the sentiment around investing in Gold/Silver/Currency, but there is no way to make any judgement around how much of global liquidity would come to these asset classes.

Net net, I feel it is mere waste of time to crysal-ball-grazing when it comes to these asset classes. Better to stick our guns to equity, where there are several ratios to conclude if we are getting something at a discount or otherwise.



Mar 15, 2011

Very difficult to predict.. there are other metals where the investible surplus can be invested by the funds gold as of now is already beyond the reach of many people ,going up further may totally alter the winds from the sail and lack of demand may eventually smoother the prices.

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